UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 Commission File Number 0-9314 ACCESS PHARMACEUTICALS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 83-0221517 - ------------------------ -------------------------- (State of Incorporation) (I.R.S. Employer I.D. No.) 2600 Stemmons Frwy, Suite 176, Dallas, TX 75207 ----------------------------------------------- (Address of principal executive offices) Telephone Number (214) 905-5100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirement for the past 90 days. Yes X No --- --- The number of shares outstanding of each of the issuer's classes of common stock, as of August 14, 2001 was 12,856,569 shares of common stock, $0.01 par value per share. Total No. of Pages 12 ----
PART I -- FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS The response to this Item is submitted as a separate section of this report. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Access Pharmaceuticals, Inc. is a Delaware corporation in the development stage. We are an emerging pharmaceutical company focused on developing both novel low development risk product candidates and technologies with longer-term major product opportunities. Together with our subsidiaries, we have proprietary patents or rights to five technology platforms: synthetic polymers, bioerodible hydrogels, Residerm TM, carbohydrate targeting technology and agents for the prevention and treatment of viral disease, including HIV. In addition, our partner, GlaxoSmithKline (formerly Block Drug Company), is marketing in the United States a product, Aphthasol R, a drug jointly developed, the first U.S. Food and Drug Administration (or FDA) approved product for the treatment of canker sores. We are developing new formulations and delivery forms to evaluate this product in additional clinical indications. We have licensed certain rights for the use of amlexanox in additional indications from GlaxoSmithKline for numerous markets excluding the U. S. and the worldwide rights for mucositis. Except for the historical information contained herein, the following discussions and certain statements in this Form 10-Q are forward-looking statements that involve risks and uncertainties. In addition to the risks and uncertainties set forth in this Form 10-Q, other factors could cause actual results to differ materially, including but not limited to our research and development focus, uncertainties associated with research and development activities, clinical trials, uncertainty associated with preclinical and clinical testing, the timing of regulatory approvals, future cash flow, timing and receipt of licensing revenues, collaborations, dependence on others, and other risks detailed in our reports filed under the Securities Exchange Act of 1934, as amended, including but not limited to our Annual Report on Form 10-K for the year ended December 31, 2000. Since our inception, we have devoted our resources primarily to fund our research and development programs. We have been unprofitable since inception and to date have received limited revenues from the sale of products. We cannot assure you that we will be able to generate sufficient product revenues to attain profitability on a sustained basis or at all. We expect to incur losses for the next several years as we continue to invest in product research and development, preclinical studies, clinical trials and regulatory compliance. As of June 30, 2001, our accumulated deficit was $34,569,000, of which $8,894,000 was the result of the write-off of excess purchase price of mergers. LIQUIDITY AND CAPITAL RESOURCES Working capital as of June 30, 2001 was $22,025,000 representing a decrease in working capital of $2,372,000 as compared to the working capital as of December 31, 2000 of $24,397,000. The 2
decrease in working capital was due to the loss from operations for the first six months of 2001. Since inception, our expenses have significantly exceeded revenues, resulting in an accumulated deficit as of June 30, 2001 of $34,569,000. We have funded our operations primarily through private sales of common stock and convertible notes. Contract research payments from corporate alliances and mergers have also provided funding for operations. We have incurred negative cash flows from operations since inception, and have expended, and expect to continue to expend in the future, substantial funds to complete our planned product development efforts. We expect that our existing capital resources will be adequate to fund our current level of operations through the year 2003. We will require substantial funds to conduct research and development programs, preclinical studies and clinical trials of potential products. Our future capital requirements and adequacy of available funds will depend on many factors, including: * the successful commercialization of amlexanox; * the ability to establish and maintain collaborative arrangements with corporate partners for the research, development and commercialization of products; * continued scientific progress in our research and development programs; * the magnitude, scope and results of preclinical testing and clinical trials; * the costs involved in filing, prosecuting and enforcing patent claims; * competing technological developments; * the cost of manufacturing and scale-up; * the ability to establish and maintain effective commercialization arrangements and activities; and * successful regulatory filings. SECOND QUARTER 2001 COMPARED TO SECOND QUARTER 2000 Revenue in the second quarter of 2001 was $10,000, as compared to no revenue in the same period of 2000. Revenue in the second quarter of 2001 is recognized over the period of the performance obligation of several licensing agreements, including various amlexanox projects. Total research spending for the second quarter of 2001 was $1,032,000, as compared to $1,069,000 for the same period in 2000, a decrease of $37,000. The decrease in expenses was the result of: * lower clinical development costs ($221,000) for amlexanox product development projects for OraDisc TM. Costs for this project were incurred in the second quarter 2000 and minimal costs were incurred in the second quarter 2001 due to the completion of OraDisc TM trials in 2000 and early 2001; and * other net decreases ($34,000). 3
The decrease in expenses was partially offset by: * higher clinical development costs ($131,000) for amlexanox cream and gel projects due to the start of clinical trials in 2001; and * higher scientific salary cost ($87,000) due to additional employees on staff. We expect research spending to increase in future quarters and remain higher than in prior quarters as we intend to hire additional scientific and clinical staff, commence additional clinical trials and accelerate preclinical development activities as we continue to develop our product candidates. Total general and administrative expenses were $463,000 for the second quarter of 2001, a decrease of $24,000 as compared to the same period in 2000. The decrease in spending was due primarily to lower compensation expenses ($99,000). These general and administrative expenses decreases were partially offset by: * higher patent costs ($21,000); * higher shareholder expenses ($21,000); and * other net increases ($33,000). Depreciation and amortization was $99,000 for the second quarter of 2001 as compared to $112,000 for the same period in 2000 reflecting a decrease of $13,000. The decrease in amortization is due to lower depreciation reflecting that some major assets have been fully depreciated. Total operating expenses in the second quarter of 2001 were $1,594,000 as compared to total operating expenses of $1,668,000 for the same period in 2000. Loss from operations in the second quarter of 2001 was $1,584,000 as compared to a loss of $1,668,000 for the same period in 2000. Interest and miscellaneous income was $350,000 for the second quarter of 2001 as compared to $223,000 for the same period in 2000, an increase $127,000. The increase in interest income was due to higher cash balances in 2001 resulting from our private placements of common stock and convertible note offering in 2000. Interest expense was $283,000 for the second quarter of 2001 as compared to $1,000 for the same period in 2000, an increase of $282,000. The increase in interest expense was due to interest accrued in 2001 on the $13.5 million convertible notes that were issued in 2000 and amortization of debt issuance costs. Net loss in the second quarter of 2001 was $1,517,000, or a $0.12 basic and diluted loss per common share, compared with a loss of $1,446,000, or a $0.13 basic and diluted loss per common share for the same period in 2000. 4
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 Revenue in the first six months of 2001 was $221,000, as compared to no revenue in the same period of 2000. Revenue in the first six months of 2001 is recognized over the period of the performance obligation of several licensing agreements, including various amlexanox projects and ResiDerm TM. Total research spending for the first six months of 2001 was $2,035,000, as compared to $1,672,000 for the same period in 2000, an increase of $363,000. The increase in expenses was the result of: * higher clinical development costs ($262,000) for amlexanox product development projects for OraDisc TM, cream and gel projects. The first Phase III study evaluating OraDisc TM was completed and a second Phase III study is scheduled to commence in 2001. During the first six months of 2001 we also commenced Phase I amlexanox gel and cream studies; and * higher scientific salary costs ($146,000) due to additional employees; The increase in expenses was partially offset by: * lower moving expenses for scientific personal ($42,000); and * other net decreases ($3,000). We expect research spending to increase in future quarters and remain higher than in prior quarters as we intend to hire additional scientific and clinical staff, commence additional clinical trials and accelerate preclinical development activities as we continue to develop our product candidates. Total general and administrative expenses were $899,000 for the first six months of 2001, a decrease of $17,000 as compared to the same period in 2000. The decrease in spending was due primarily to the following: * lower compensation expenses ($81,000); * lower listing fees in 2001 due to our initial listing on the American Stock Exchange in 2000 ($32,000); and * other net decreases ($2,000). These general and administrative expense decreases were partially offset by: * higher shareholder expenses ($56,000); and * higher patent costs ($42,000). Depreciation and amortization was $201,000 for the first six months of 2001 as compared to $223,000 for the same period in 2000 reflecting a decrease of $22,000. The decrease in amortization was due to lower depreciation reflecting that some major assets have been fully depreciated. Total operating expenses in the first six months of 2001 were $3,135,000 as compared to total 5
operating expenses of $2,811,000 for the same period in 2000. Loss from operations in the first six months of 2001 was $2,914,000 as compared to a loss of $2,811,000 for the same period in 2000. Interest and miscellaneous income was $792,000 for the first six months of 2001 as compared to $288,000 for the same period in 2000, an increase of $504,000. The increase in interest income was due to higher cash balances in 2001 resulting from our private placements of common stock and convertible note offering in 2000. Interest expense was $566,000 for the first six months of 2001 as compared to $3,000 for the same period in 2000, an increase of $563,000. The increase is interest expense is due to interest accrued on the $13.5 million convertible notes issued in 2000 and amortization of debt issuance costs. Net loss in the first six months of 2001 was $2,688,000, or a $0.21 basic and diluted loss per common share, compared with a loss of $2,526,000, or a $0.26 basic and diluted loss per common share for the same period in 2000. PART II -- OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. ITEM 2 CHANGES IN SECURITIES None. ITEM 3 DEFAULTS UPON SENIOR SECURITIES None ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders was held on May 21, 2001 in New York, NY. At that meeting the following matters were submitted to a vote of the stockholders of record. The proposals were approved by the stockholders, as follows: 6
* Three directors were reelected for three year terms with the following votes: Herbert H. McDade, Jr., 7,348,123 - For; and 42,828 - Withheld Authority Kerry P. Gray; 7,348,121 - For; and 42,830 - Withheld Authority J. Michael Flinn; 6,948,117 - For; and 442,834 - Withheld Authority * The terms of office as a director of Access of each of Stephen B. Howell, Max Link, John J. Meakam, Jr. and Preston Tsao continued after the meeting. * A proposal to amend our 1995 stock option plan, as amended, to adjust the number of options to be granted annually to non-employee directors from 5,000 to 10,000 shares of common stock was approved with 6,887,955 - For; 494,316 - Against; and 8,680 - Abstain. * A proposal to approve the 2001 Access Pharmaceuticals, Inc. restricted stock plan was approved with 7,305,848 - For; 78,421 - Against; and 6,682 - Abstain. * A proposal to ratify the appointment of Grant Thornton LLP as independent certified public accountants for the Company for the fiscal year ending December 31, 2001 was approved with 6,953,025 - For; 434,438 - Against; and 3,487 - Abstain. ITEM 5 OTHER INFORMATION None ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K Exhibits: 10.19 Supplemental Lease Agreement between Pollock Realty Corporation and us dated February 9, 2001 Reports on Form 8-K: None 7
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. ACCESS PHARMACEUTICALS, INC. Date: August 14, 2001 By:/s/ Kerry P. Gray --------------------- Kerry P. Gray President and Chief Executive Officer Date: August 14, 2001 By:/s/ Stephen B. Thompson ------------------------- Stephen B. Thompson Vice President and Chief Financial Officer 8
Access Pharmaceuticals, Inc. and Subsidiaries (a development stage company) Condensed Consolidated Balance Sheets <TABLE> <CAPTION> June 30, 2001 December 31, 2000 -------------- -------------- ASSETS (unaudited) <S> <C> <C> Current assets Cash and cash equivalents $ 5,615,000 $ 8,415,000 Short term investments, at cost 18,174,000 17,394,000 Accounts receivable 1,000 251,000 Accrued interest receivable 68,000 196,000 Prepaid expenses and other current assets 68,000 133,000 ------------- ------------- Total current assets 23,926,000 26,389,000 Property and equipment, net 128,000 116,000 Debt issuance costs, net 770,000 861,000 Licenses, net 831,000 887,000 Goodwill, net 1,992,000 2,115,000 Other assets 159,000 158,000 ------------- ------------- Total assets $ 27,806,000 $ 30,526,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 615,000 $ 1,158,000 Accrued interest payable 756,000 283,000 Deferred revenues 530,000 551,000 ------------- ------------- Total current liabilities 1,901,000 1,992,000 Convertible notes 13,530,000 13,530,000 ------------- ------------- Total liabilities 15,431,000 15,522,000 Commitments and contingencies - - Stockholders' equity Preferred stock - $.01 par value; authorized 2,000,000 shares; none issued or outstanding - - Common stock - $.01 par value; authorized 50,000,000 shares; issued, 12,856,569 at June 30, 2001 and 12,844,669 at December 31,2000 133,000 132,000 Additional paid-in capital 47,860,000 47,802,000 Notes receivable from stockholders (1,045,000) (1,045,000) Treasury stock, at cost - 819 shares (4,000) (4,000) Deficit accumulated during the development stage (34,569,000) (31,881,000) ------------- ------------- Total stockholders' equity 12,375,000 15,004,000 ------------- ------------- Total liabilities and stockholders' equity $ 27,806,000 $ 30,526,000 ============= ============= </TABLE> The accompanying notes are an integral part of these statements. 9
Access Pharmaceuticals, Inc. and Subsidiaries (a development stage company) Condensed Consolidated Statements of Operations (unaudited) <TABLE> <CAPTION> Three months ended Six months ended February 24, June 30, June 30, 1988 -------------------------- -------------------------- (inception) to 2001 2000 2001 2000 June 30, 2001 ------------ ------------ ------------ ------------ -------------- <S> <C> <C> <C> <C> <C> Revenues Research and development $ - $ - $ - $ - $ 2,711,000 Option income - - - - 2,164,000 Licensing revenues 10,000 - 221,000 - 653,000 ------------ ------------ ------------ ------------ -------------- Total revenues 10,000 - 221,000 - 5,528,000 Expenses Research and development 1,032,000 1,069,000 2,035,000 1,672,000 18,015,000 General and administrative 463,000 487,000 899,000 916,000 12,560,000 Depreciation and amortization 99,000 112,000 201,000 223,000 2,177,000 Write-off of excess purchase price - - - - 8,894,000 ------------ ------------ ------------ ------------ -------------- Total expenses 1,594,000 1,668,000 3,135,000 2,811,000 41,646,000 ------------ ------------ ------------ ------------ -------------- Loss from operations (1,584,000) (1,668,000) (2,914,000) (2,811,000) (36,118,000) Other income (expense) Interest and miscellaneous income 350,000 223,000 792,000 288,000 2,649,000 Interest and debt expense (283,000) (1,000) (566,000) (3,000) (1,100,000) ------------ ------------ ------------ ------------ -------------- 67,000 222,000 226,000 285,000 1,549,000 ------------ ------------ ------------ ------------ -------------- Net loss $(1,517,000) $(1,446,000) $(2,688,000) $(2,526,000) $ (34,569,000) ============ ============ ============ ============ ============== Basic and diluted loss per common share $(0.12) $(0.13) $(0.21) $(0.26) ============ ============ ============ ============ Weighted average basic and diluted common shares outstanding 12,853,923 11,479,207 12,851,149 9,547,679 ============ ============ ============ ============ </TABLE> The accompanying notes are an integral part of these statements. 10
Access Pharmaceuticals, Inc. and Subsidiaries (a development stage company) Condensed Consolidated Statements of Cash Flows (unaudited) <TABLE> <CAPTION> February 24, Six months ended June 30, 1988 -------------------------- (inception) to 2001 2000 June 30, 2001 ------------ ------------ ------------- <S> <C> <C> <C> Cash flows form operating activities: Net loss $(2,688,000) $(2,526,000) $(34,569,000) Adjustments to reconcile net loss to cash used in operating activities: Write-off of excess purchase price - - 8,894,000 Warrants issued in payment of consulting expenses 41,000 - 970,000 Research expenses related to common stock granted - - 100,000 Depreciation and amortization 201,000 223,000 2,177,000 Amortization of debt costs 91,000 - 145,000 Deferred revenue (21,000) 428,000 420,000 Change in operating assets and liabilities: Accounts receivable 250,000 48,000 (2,000) Accrued interest receivable 128,000 (100,000) (68,000) Prepaid expenses and other current assets 65,000 46,000 (69,000) Licenses - (100,000) (525,000) Other assets (1,000) - (7,000) Accounts payable and accrued expenses (543,000) 88,000 (147,000) Accrued interest payable 473,000 - 756,000 ------------ ------------ ------------- Net cash used in operating activities (2,004,000) (1,893,000) (21,925,000) ------------ ------------ ------------- Cash flows from investing activities: Capital expenditures (34,000) (63,000) (1,279,000) Sales of capital equipment - - 15,000 Purchases of short term investments and certificates of deposit (780,000) (12,519,000) (18,174,000) Purchase of businesses, net of cash acquired - - (226,000) Other investing activities - - (150,000) ------------ ------------ ------------- Net cash used in investing activities (814,000) (12,582,000) (19,814,000) ------------ ------------ ------------- Cash flows from financing activities: Proceeds from notes payable - - 721,000 Payments of principal on obligations under capital leases - (26,000) (750,000) Purchase of treasury stock - (750,000) (754,000) Cash acquired in merger with Chemex - - 1,587,000 Notes receivable from shareholders - - (1,045,000) Proceeds from convertible note, net - - 12,615,000 Proceeds from stock issuances, net 18,000 15,381,000 34,980,000 ------------ ------------ ------------- Net cash provided by financing activities 18,000 14,605,000 47,354,000 ------------ ------------ ------------- Net increase (decrease) in cash and cash equivalents (2,800,000) 130,000 5,615,000 Cash and cash equivalents at beginning of period 8,415,000 869,000 - ------------ ------------ ------------- Cash and cash equivalents at end of period $ 5,615,000 $ 999,000 $ 5,615,000 ============ ============ ============= </TABLE> The accompanying notes are an integral part of these statements. 11
Access Pharmaceuticals, Inc. and Subsidiaries (a development stage company) Notes to Condensed Consolidated Financial Statements Six Months Ended June 30, 2001 and 2000 (unaudited) (1) Interim Financial Statements The consolidated balance sheet as of June 30, 2001 and the consolidated statements of operations and cash flows for the three and six months ended June 30, 2001 and 2000 were prepared by management without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, except as otherwise disclosed, necessary for the fair presentation of the financial position, results of operations, and changes in financial position for such periods, have been made. Certain amounts have been reclassified to conform with current period classification. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2000. The results of operations for the period ended June 30, 2001 are not necessarily indicative of the operating results which may be expected for a full year. The consolidated balance sheet as of December 31, 2000 contains financial information taken from the audited financial statements as of that date.